• Who is responsible for managing your inventory levels and have you given them the necessary tools and power in your company to be successful ? Do you annually have a process to evaluate poor-selling products that you manufacture and determine if you should no longer produce these items ? Slow-moving inventory is equivalent to poor cash flow . If you struggle with this problem , now is the time to examine your business and decide what items you should no longer manufacture . If you can prune the bottom 10 percent of your manufactured products , you could possibly solve part of your slow-moving inventory issue .
• How often are you evaluating your purchase costs to determine when increases in the prices of products need to occur ? The days of one or two annual price adjustments are over . To stay profitable and sustainable , you have to be proactive and aggressive in pushing these price increases out to the customer . With items like lumber and steel , prices are changing daily and you have to be prepared to adjust .
Cash Flow Management
We know that inventory management affects your cash flow , so you will need to determine how much inventory is best to have on hand . Here are some other things to help manage your cash flow :
• Monitor your accounts receivable . You do not want to end up becoming the bank for your customers . During times when the economy begins to slow , customers begin to hold their cash longer which means you get paid later compared to when the sale occurred . When this happens , you are having to utilize other sources of cash for yourself like a line of credit to cover your cash demands from your business .
• Have a plan for paying your accounts payable . Do your ratios for A / R Days ( how quickly you receive payment ) match up with A / P Days ( how quickly you pay your bills )? Try to match up your outgoing payments with your customers ’ incoming payments . This will help with having to utilize as much of your line of credit and other financing avenues , which comes with interest .
• Control when and how often you make distributions out of your company for owners . Distribution should be spread out or timed for when cash flow is the strongest .
• Manage your relationship with your bank . Periodically use your line of credit to show you still need it . Have the proper amount of leveraging to help with cash flow . Continue to talk to your bank representative and let them know how business is going . Don ’ t be afraid to ask them for help when you need an increase in financing .
• Evaluate your staffing needs . Retaining all of your employees is not always possible when things get tight . While it ’ s not an ideal situation , you should know where you need to let go if and when that time comes . A best practice is to rank your team long before you have to make a decision of letting someone go . By doing this before , you are taking the personal element out of the decision which can make your decision more difficult .
Improving Cash Flow
It ’ s not enough to know what your pain points are . You will need to know how to track your business cash flow .
• Know your Key Performance Indicators ( KPIs ) and which ones you will be monitoring . For example , Current Ratio , Inventory Days Ratio , Accounts Receivable Days Ratio , Accounts Payable Days Ratio , Capacity Utilization Ratio , Scrap Percentage Ratio , Customer Return Rate , and Lead-Time Ratio are some great ones to monitor for Manufacturers .
• Prepare a budget and review all expenses . Continually update throughout the year . It is not an annual exercise !
• Reduce waste . Consider the benefits of Lean manufacturing , which focuses on minimizing waste within manufacturing systems while simultaneously maximizing productivity .
• Renegotiate with suppliers .
• Offer discounts to your customers in exchange for early payments .
• Accept multiple forms of payment . Credit , ACH and other electronic payment methods are critical for businesses . Not offering this could force consumers to look elsewhere for goods .
• Be proactive with late payers . You will need to find the right person for this job — someone who is firm and direct without threatening .
2008 vs . 2023
Looking back at history , in 2008 when the last recession hit , many companies were faced with weaker balance sheets . They were highly leveraged with debt and they were not prepared for these challenges . The difference in 2023 , is the balance sheets are stronger , there is lower debt leverage , and most businesses learned from their experience in 2008 , coming to the table better prepared to learn from past mistakes , quicker to pivot or adapt , and have a plan in place for a possible recession .
We have a manufacturing team ready to serve the needs of your business . Reach out to us . We are happy to help .
by : Dustin Raber , CPA , CMP Principal
Rea & Associates 230 North Market St . Wooster , OH 44691
( 330 ) 521-4534 dustin . raber @ reacpa . com